Homeowners insurance replacement cost vs. actual cash value

By Allstate

Last updated: February 2024

Replacement cost and actual cash value refer to how your homeowners insurance policy reimburses you for property damage after a covered loss. While both types of coverage help with the costs of rebuilding your home or replacing damaged items after a covered loss, actual cash value policies are based on the items' depreciated value while replacement cost coverage does not account for depreciation.

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What is actual cash value coverage?

A homeowners insurance policy with actual cash value coverage typically determines value by taking the cost to replace your personal belongings and reducing that amount due to depreciation from factors such as age or wear and tear, says the Insurance Information Institute (III).

Personal property coverage helps pay to repair or replace your personal belongings if they are stolen or damaged by a covered peril, such as fire. A policy that provides actual cash value coverage typically reimburses you for the depreciated value of an item. For example, if a fire damages your TV, a policy with actual cash value coverage would reimburse you for its depreciated value, which may be less than it will cost to purchase a new one.

So, the amount you'd receive from your insurer after a covered claim may not be equal to the cost of replacing your belongings with new ones or rebuilding your home at today's prices.

What is replacement cost coverage?

A replacement cost policy helps pay to repair or replace damaged property without deducting for depreciation, says the III. This type of coverage may be available for both your personal belongings and your home if they are damaged by a covered peril.

Personal property coverage. If you have replacement cost coverage for your personal property, your insurance will typically help cover the cost of buying a new item at today's price. For example, if your TV is stolen, replacement cost coverage will likely reimburse you enough to purchase a new one of similar model and quality. It is a good idea to keep an inventory of your personal belongings and estimate what it would cost to replace them, says the III.

Dwelling coverage. Most homeowners insurance policies come with replacement cost coverage for the structure of your home. Dwelling coverage typically helps pay to repair or rebuild your home using materials of a similar quality, says the III. It generally does not take into account depreciation of your home due to factors such as age. For example, if your kitchen is damaged in a fire, replacement cost coverage may help pay to replace your cabinets using materials of a similar quality, whether they were 15 years old or brand new.

While you can get replacement coverage for most properties, says the III, you may need modified replacement cost coverage if you have an older home. This type of policy may cover the cost of rebuilding features of an older home, such as plaster walls, with alternative materials more commonly used today.

It's important to be aware of how much it would cost to rebuild your home if necessary and keep your insurance agent updated on any upgrades you have made to the property, says the III. You may need to update the limits of your policy to keep up with your needs or with building costs in your area.

Does my homeowners insurance policy provide actual cash value or replacement coverage?

If you're not sure whether you have actual cash value or replacement coverage, check your current homeowners insurance policy declarations. Contact your insurance provider if you have any questions.

Deductibles and limits

Regardless of what type of coverage you have, keep in mind you may also have to pay a deductible before your insurance coverage kicks in after a covered loss. Also, both types of coverage are subject to limits, which is the maximum amount your policy will pay toward a covered loss. Review your policy to be sure you understand which type of coverage your policy provides as well as the amount of your deductible and coverage limits. Your insurance provider can help you make changes to fit your needs.

Consider adding an endorsement to your homeowners coverage

A standard homeowners insurance policy may provide limited coverage for certain valuables. That's where scheduled personal property coverage can help. Scheduled personal property, which is a type of endorsement, offers increased protection for specific items, such as valuable jewelry, artwork or musical instruments. It may also provide protection for additional risks that are not covered by standard personal property coverage.

Have more questions? Your insurance provider can provide more information about replacement cost coverage and actual cash value coverage so you can choose the protections that are right for you.